Saturday, October 8, 2011

Did you kn ow.§1.1 Laws that provide for the distribution of a debtor’s property among creditors have been a part of civil jurisprudence since ancient times. Under the Code of Hammurabi, an insolvent debtor was often sold into slavery. In Celtic Ireland, a creditor would often “fast on” a debtor by placing himself or herself before the debtor’s doorway until the debt was paid. See generally Louis Edward Levinthal, The Early History of Bankruptcy Law, 66 U Pa L Rev 223 (1918).

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§1.2 Most of the operative provisions of the Bankruptcy Code are located in Title 11 of the United States Code. This title is divided into nine chapters—1, 3, 5, 7, 9, 11, 12, 13, and 15. Some of them offer separate forms of relief to financially distressed debtors. Chapter 7 provides for the automatic appointment of a trustee who will liquidate all of the debtor’s nonexempt property and distribute the proceeds to creditors. Chapter 9 permits troubled municipalities to reorganize their affairs under the protection of the bankruptcy court. Chapter 11 allows for the reorganization of distressed debtors; this form of relief is often selected by troubled businesses that need some time to restructure their financial affairs. Chapter 12 permits family farmers to reorganize their farming operations under the protection of the bankruptcy court. Chapter 13 provides for the adjustment of debts of persons with “regular income.” This chapter expands the scope of the old wage-earner provisions contained in Chapter XIII of the Bankruptcy Act of 1898. Finally, Chapter 15 deals with ancillary and cross-border cases.

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§1.3 In 1983, the U.S. Supreme Court, acting pursuant to 28 USC 2075, adopted the Federal Rules of Bankruptcy Procedure (Bankruptcy Rules). These rules were drafted to conform with the provisions of the Code and govern procedure in all federal bankruptcy courts; they may not abridge, enlarge, or modify the substantive rights granted under the Code. 28 USC 2075. Recent revisions to the Bankruptcy Rules were made in 2003, 2008, 2009, and 2010 (effective December 1).

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§1.6 When litigating in the bankruptcy court, the practitioner must be keenly aware of the distinction made in the jurisdictional provisions of the Bankruptcy Code between core and noncore (or related) proceedings. This distinction is important primarily because in related proceedings, bankruptcy judges may not enter final orders and judgments without the consent of the litigants.

2. Core Proceedings

§1.7 What's New in this Section Bankruptcy judges may hear and decide all core proceedings and may enter orders and judgments in those proceedings subject to appellate review. 28 USC 157(b)(1). Examples of core proceedings are listed in 28 USC 157(b)(2) and include (1) motions to lift the automatic stay, (2) actions to recover fraudulent conveyances and preferences, and (3) determinations whether certain debts are dischargeable. Also included on the list are “other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship.” 28 USC 157(b)(2)(O). For decisions construing the scope of core proceedings, see In re Pioneer Inv Servs Co, 946 F2d 445 (6th Cir 1991); Bliss Techs, Inc v HMI Indus (In re Bliss Techs, Inc), 307 BR 598 (ED Mich 2004); and In re Marshall, 118 BR 954 (WD Mich 1990).

§1.17 In general, a debtor who seeks bankruptcy relief may file a bankruptcy petition in the court for the district in which the debtor’s domicile, residence, principal place of business, or principal assets have been located for 180 days before the date of filing. 28 USC 1408. In the Eastern District of Michigan, LBR 1071-1(a) (ED Mich) establishes three administrative units (Detroit, Flint, and Bay City) for cases filed in that district. If a case is filed in the wrong administrative unit—for example, if a corporation headquartered in Bay City files its petition in Detroit—the bankruptcy judge may transfer that case to the proper administrative unit. LBR 1071-1(c)(1) (ED Mich); see, e.g., In re Romzek, 50 BR 720 (Bankr ED Mich 1985). The Bankruptcy Court for the Western District of Michigan has adopted a similar local rule. See LBR 1014 (WD Mich).

§1.20 On February 3, 2004, the U.S. Bankruptcy Court for the Western District of Michigan adopted Administrative Order No 2004-02, which provides for the electronic filing, signing, verification, and service of documents. This order provides that the electronic filing of a document in accordance with the Administrative Procedures “constitutes the filing of the document for all purposes.” On July 14, 2004, this court followed with Administrative Order No 2004-06, which requires “all petitions, pleadings and other papers filed in all cases and proceedings, whether pending or new,” to be filed electronically beginning on January 1, 2005. The Administrative Order was incorporated into and was superseded by the February 1, 2007, comprehensive revisions to the Western District Local Rules. Similarly, the Eastern District implemented electronic filing on a mandatory basis on January 1, 2006, and electronic filing is covered in the Eastern District’s local rules.

§1.21 In every bankruptcy case, there are certain persons, called parties in interest, who perform their statutory duties and attempt to enforce their rights and privileges. They are the debtor, the trustee, the U.S. trustee, secured creditors, unsecured creditors, and, in certain cases, creditors’ committees and equity security holders.

§1.22 In Chapter 7 cases, a debtor may be an individual, a partnership, a corporation, or some other artificial person. However, only an individual may receive a discharge of debts in Chapter 7 cases; other entities may not. The 2005 amendments require that a debtor receive an individual or group briefing that outlines the opportunities available for credit counseling. The briefing must have been received within the 180-day period preceding the filing of the bankruptcy case. 11 USC 109(h)(1). This requirement is commonly referred to as the requirement for prefiling credit counseling.

Chapter 7 debtors must file certain documents with the bankruptcy court; must appear for questioning by creditors, the bankruptcy administrator, and the trustee at the meeting of creditors; and must perform other duties specified in the Code and the Bankruptcy Rules. If the individual debtor performs these duties and is not guilty of any bad acts as defined in the Code, the debtor will be granted a general discharge of prepetition debts and will retain exempt property to be able to make a fresh start in life.

After the debtor meets the duties specifically required under the Code, the debtor is required to complete an instructional course concerning personal financial management to obtain a discharge. 11 USC 727(a)(1). This is another requirement added by BAPCPA.

§1.23 Individuals, partnerships, and corporations all qualify for relief under Chapter 11 of the Code. A Chapter 11 debtor is normally retained as debtor-in-possession at the outset of the case and, as such, continues to operate its business as a fiduciary for all creditors within the guidelines prescribed by the bankruptcy court. The debtor, if not displaced by a trustee, then negotiates with its secured and unsecured creditors the terms of a plan calling for either the reorganization or the liquidation of the debtor’s assets and the adjustment of the rights of creditors and stockholders. This plan is sent to all creditors for a vote, and, after the votes are tallied, the plan may be confirmed and given effect by the bankruptcy court. Special rules apply for small businesses. See chapter 6.

In 2005, BAPCPA enacted comprehensive revisions to 11 USC 1112 and 1104, addressing conversion or dismissal and appointment of trustees. As amended, 11 USC 1112 provides that the courts “shall” rather than “may” convert or dismiss a case if it is in the best interests of creditors and if the movant establishes cause. Comprehensive examples of cause are set forth in the provision, and, in the event that the court decides that there is a basis or cause to dismiss or convert, the court has the alternative of appointing a Chapter 11 trustee or examiner.

§1.24 Only “a family farmer or family fisherman with regular annual income” may be the subject of a Chapter 12 case. 11 USC 109(f). The term family farmer includes individuals, partnerships, and corporations but does not encompass all entities that are engaged in farming operations. 11 USC 101(18). Family farmers who seek relief under Chapter 12 normally file their reorganization plans soon after their case has been commenced. Chapter 12 plans provide for payments to be made on secured and unsecured debt over a period that may last as long as five years. Confirmation of the plan does not result in the family farmer’s discharge; this is granted only when the debtor completes making payments under the plan or qualifies for a hardship discharge.

§1.25 Only “individuals with regular income” may file Chapter 13 petitions and propose plans providing for the composition and extension of debts. Relief under this chapter is not available to artificial persons, nor is it available to individuals who do not receive regular income or are carrying heavy debt loads. 11 USC 109. A Chapter 13 debtor normally files, along with a voluntary petition, a proposed Chapter 13 plan, in which the debtor proposes to pay all or a portion of the debts over time with regular income. Unlike the Chapter 7 debtor, the Chapter 13 debtor is not required to surrender nonexempt property to the trustee for liquidation; the plan may propose that the debtor keep this property while he or she pays the debts. Unlike the Chapter 11 debtor, the Chapter 13 debtor does not receive a discharge once the plan is confirmed; discharge is granted only when the debtor performs all the obligations under the plan or otherwise qualifies for a hardship discharge.

As of April 1, 2007, the eligibility requirements for Chapter 13 debtors have been increased. Only individuals with regular income who have, on the date of filing a Chapter 13 petition, noncontingent and liquidated secured debts in an amount less than $1,010,650 and noncontingent and liquidated unsecured debts in an amount less than $336,900 are eligible for Chapter 13 relief. 11 USC 109(e). The debt limits are adjusted every three years, 11 USC 104(a), and increased to $1,081,400 and $360,475 effective April 1, 2010. See generally In re Pisczek, 269 BR 641 (Bankr ED Mich 2001); In re Faulhaber, 269 BR 348 (Bankr WD Mich 2001).

§1.26 In Chapter 7 cases, the U.S. trustee appoints an interim trustee on the entry of an order for relief, which generally occurs when the bankruptcy petition is filed. The trustee is selected from the panel of trustees for the judicial district in which the Chapter 7 petition has been filed by or against the debtor. The U.S. trustee may serve as trustee in a Chapter 7 case if none of the panel trustees are able or willing to serve. At the meeting of creditors, the creditors may vote either to allow the interim trustee to continue as the permanent trustee or to replace that person with another from the panel. See generally In re Lindell Drop Forge Co, 111 BR 137 (Bankr WD Mich 1990). If no voting takes place, the interim trustee becomes the permanent trustee.

The trustee is a representative of the debtor’s estate and as such is required to investigate the debtor’s affairs and liquidate his or her nonexempt property for the benefit of creditors. The trustee may also seek to augment property of the estate by filing actions to recover preferences, fraudulent conveyances, and other voidable transfers made by the debtor to third parties. Once this property is collected and reduced to cash, the Chapter 7 trustee files a final report and account with the bankruptcy court in which the trustee proposes how these cash proceeds should be distributed. When the court approves this final report and account, the trustee distributes the cash to creditors and closes the Chapter 7 case. See chapter 5 for further discussion of the trustee’s role in Chapter 7 cases.